UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
No. 00-50301
In The Matter Of: GRIMLAND, INC.,
Debtor
TNB FINANCIAL, INC.,
Appellant,
v.
JAMES F. PARKER INTERESTS,
Appellee.
Appeal from the United States District
Court for the Western District of Texas
March 12, 2001
Before: JOLLY and DAVIS, Circuit Judges, and RESTANI, Judge.*
RESTANI, Judge:
This is an appeal of a district court order affirming a
bankruptcy court order of surcharge. The surcharged lienholder
appeals. We hold that the bankruptcy court erred in not granting
the lienholder’s objection to the surcharge. Any technical
failure to meet the deadline for objections should not have been
determinative under the unique facts of this case.
FACTS AND PRIOR PROCEEDINGS
*
Judge of the United States Court of International
Trade, sitting by designation.
Grimland, Inc. (“Grimland”) operated an automotive
transmission and engine rebuilding business in Austin, Texas,
before it filed a petition for bankruptcy under Chapter 7 in
January of 1999. [R2-50-247.] Grimland had stored over a
hundred barrels of waste oil on its premises, which it leased
from James F. Parker Interests (“Parker”). [Id.] The trustee of
Grimland’s estate moved to abandon all of Grimland’s personal
property, including the waste oil. [Id.] Parker objected to the
abandonment, and as part of an agreed order settling the
abandonment dispute, Parker was granted an administrative expense
claim of up to $45,000 to cover the costs of removing the waste
oil and as a reasonable rental for storing the estate’s personal
property on its premises pending liquidation. [Id. at 247-248.]
During these proceedings, the trustee auctioned off all the
personal property of Grimland. [Id. at 248.] Appellant TNB
Financial, Inc. (“TNB”), which held a perfected purchase money
security interest in all of Grimland’s personal property securing
a debt of approximately $20,000, did not object to the sale based
on assurances from the trustee that its position would be
protected. The sale generated proceeds of approximately $70,000,
which left the estate with funds of about $75,000 to distribute
to creditors. [R2-71-313 to 314.] Thus, after the sale TNB was
2
substantially oversecured and, except for the surcharge at issue,
would have been repaid in full.1
As of July of 1999, the actual costs to dispose of the waste
oil were more than $65,000, and the rental for storage of
Grimland’s personal property pending liquidation was almost
$24,000. [R2-50-249.] The total costs of the waste oil
remediation and the rental of the premises were thus almost twice
what Parker had previously been allowed as an administrative
expense. Parker presumably realized by May of 1999 that its
expenses, for rent and for environmental remediation, would
greatly exceed its administrative expense claim. On May 21,
1999, without specifying the amount of the costs, Parker moved to
have the collateral securing TNB’s lien surcharged for the
remediation and rental costs Parker had incurred pursuant to §
506(c) of the Bankruptcy Code. [R2-36.] In accordance with
Local Bankruptcy Rule 9014 of the Western District of Texas,
Parker’s motion notified all the creditors who had been served
with the motion that they had 20 days in which to request a
hearing to object to the motion. [Id.] On May 28, 1999 Parker
filed a supplemental surcharge motion to cover additional rental
and remediation expenses and estimated therein a surcharge
“exceed[ing] $70,000.” [R2-38-209.]
1
Travis County, Texas also asserted a security interest in
Grimland’s collateral in the form of an ad valorem tax lien. It
does not appear as a party in this appeal.
3
TNB was served with Parker’s surcharge motions. [R2-36-175;
R2-38-223.] It did not object to Parker’s first motion, however,
within the 20-day window provided by Local Rule 9014. [R2-78-315
to 316.] Thus, on June 21, 1999, more than 20 days after the
filing of Parker’s first motion and still with no objection by
TNB, the bankruptcy court granted Parker’s first open-ended
surcharge motion. [R2-42.] On June 22, 1999, the very next day,
TNB filed an objection to Parker’s first motion. [R2-43.] The
clerk of the bankruptcy court treated the objection as a response
to Parker’s second, supplemental surcharge motion. A hearing on
the second motion was set for July 20, 1999.2 At the hearing,
the bankruptcy court stated that surcharging TNB’s collateral for
the rental and remediation costs was clearly contrary to Fifth
Circuit precedent. [R2-78-317.] The bankruptcy court also
stated, however, that TNB had had ample time to object to
Parker’s first surcharge motion and had not done so. [Id. at 315
to 316.] Accordingly, the bankruptcy court granted the second
surcharge motion, which, when combined with the first surcharge
motion, had the effect of completely stripping TNB of its lien.
[Id. at 321.]
TNB then filed, on July 26, 1999, motions for rehearing on
both of Parker’s surcharge motions. [R2-47-242; R2-46-245.] The
2
It is unclear when TNB’s counsel, who was hired on June
9, 1999, first learned that the first surcharge order had been
entered. In any case, TNB does not dispute that it neglected to
meet the required deadline and seeks relief under other grounds.
4
bankruptcy court held a hearing on September 7, 1999, at which it
refused to reconsider the two orders it had entered in response
to Parker’s motions. [R2-79.] It reasoned that as it had done
nothing more than enter an order in response to an unopposed
motion, and as it was the responsibility of creditors to protect
their own interests, there were no grounds under Fed. R. Civ. P.
60(b) to reconsider the first surcharge motion. [Id. at 341 to
342.] With regard to the second motion, the bankruptcy court
concluded that its disposition of the first surcharge motion was
dispositive. [Id. at 342.]
TNB appealed the bankruptcy court’s refusal to reconsider
its surcharge order to the district court. [R1-2.] The district
court affirmed both the entry of the first surcharge order and
the bankruptcy court’s refusal to reconsider its actions. [R1-7-
112 to 114.]
DISCUSSION3
I. Equitable Mootness
Parker argues that this appeal is equitably moot. Unlike
constitutional mootness, equitable mootness in the context of a
bankruptcy appeal is not rooted in the requirements of Article
III of the Constitution. Rather, it is a doctrine that courts
have developed in response to the particular problems presented
3
The court has jurisdiction pursuant to 28 U.S.C. § 1291
(1994), as this is an appeal of a final decision of a district
court.
5
by the consummation of plans of reorganization under Chapter 11.4
An appeal is equitably moot when a plan of reorganization has
been so substantially consummated that a court can order no
effective relief even when there may still be a live dispute
between parties to the bankruptcy proceeding. The doctrine rests
on the need for finality, and the need for third parties to rely
on that finality, in bankruptcy proceedings. See generally
Nationwide Mut. Ins. Co. v. Berryman Prods., Inc. (In re Berryman
Prods., Inc.), 159 F.3d 941 (5th Cir. 1998); Manges v. Seattle-
First Nat’l Bank (In re Manges), 29 F.3d 1034 (5th Cir. 1994),
cert. denied, 513 U.S. 1152 (1995).
This Circuit has set forth a three-factor test for when a
bankruptcy case is equitably moot. These factors are, (1)
whether the complaining party has failed to obtain a stay, (2)
whether the plan (here, the liquidation) has been substantially
consummated, and (3) whether the relief requested would affect
the rights of parties not before the court or the success of the
plan. Berryman, 159 F.3d at 944. Neither party disputes that
TNB did not seek and has not won a stay of the distribution in
this case, or that all of Grimland’s assets have been sold and
all the proceeds distributed. The parties disagree as to the
4
Equitable mootness normally arises where a Chapter 11
reorganization plan is at issue. Because we find the doctrine
inapplicable on other grounds, we need not resolve whether or not
the doctrine may be applied in a liquidation under Chapter 7.
6
effect of the relief TNB seeks on persons not currently before
this court.
TNB argues that third parties will not be disturbed if the
surcharge order is reversed. It argues that reversal would
require simply that Parker repay TNB the value of its secured
claim. Parker responds that reversing the surcharge order would
require it to demand from the contractors responsible for
cleaning up the Grimland premises the monies it paid for their
services. Parker further contends that reversing the surcharge
order would require the other administrative claimants in this
case to disgorge some of their recoveries.
First, reversing the surcharge order would have no effect on
payments to the various parties who cleaned up the waste oil on
the Grimland premises. Parker’s responsibility to remedy the
property is independent of the administration of the bankruptcy
proceedings, see 42 U.S.C. § 9607(a) (1994); the bankruptcy
proceedings simply provided a mechanism for Parker to reach
agreement with Grimland over its share of the costs.
Second, assuming arguendo that the administrative claimants
are the types of third parties the equitable mootness doctrine
was meant to protect, reversing the surcharge order would have no
direct effect on the other administrative claimants.5 The other
5
Whether Parker’s claim is truly an administrative claim
or arises at least in part from pre-bankruptcy liabilities of
Grimland is not resolved here. See Texas v. Lowe (In re H.L.S.
(continued...)
7
administrative claimants in this case would be affected if the
surcharge under 11 U.S.C. § 506(c) (1994) acted to strip TNB of
its priority so as to benefit all the parties junior to it.
Though TNB may have been stripped of its lien in effect, it was
not formally stripped of it. Rather, the § 506(c) surcharge
simply required TNB to pay Parker for certain expenses of Parker
that supposedly benefitted TNB. Reversing the surcharge order
would simply require Parker to repay TNB. As the surcharge order
did not formally reorder the priorities of TNB, Parker, and the
other administrative claimants, this appeal presents a simple
dispute between TNB and Parker.6 Accordingly, the appeal is not
equitably moot.
II. The Surcharge Order
TNB argues on appeal that the bankruptcy court, and the
district court on appeal, should have granted its motion to
reconsider under Fed. R. Civ. P. 60(b).7 TNB argues that in
5
(...continued)
Energy Co., Inc.), 151 F.3d 434, 439 (5th Cir. 1998) (finding
expenses for clean-up of post-petition environmental liabilities
to be administrative expenses; not reaching the issue of whether
post-petition expenses for remediation of pre-petition
environmental liabilities are administrative expenses).
6
Of course, the administrative claimants are not strangers
to the bankruptcy case, and as parties intimately connected to
the case administration, their expectations may not be settled,
unlike purchasers at sales of estates. We make no determinations
as to what further actions the bankruptcy court may wish to take
in this matter with regard to administrative claimants.
7
TNB also argues that Hartford Underwriters Ins. Co. v.
(continued...)
8
granting Parker’s motions to surcharge, the bankruptcy court made
a mistake, which is a basis for relief under Rule 60(b).8
The bankruptcy court opined, at the July 20 hearing, that
the surcharge order was clearly contrary to Fifth Circuit
precedent. Parker has not rebutted this point. Indeed, 11
U.S.C. § 506(c) provides that, “The trustee may recover from
property securing an allowed secured claim the reasonable,
necessary costs and expenses of preserving, or disposing of, such
property to the extent of any benefit to the holder of such
claim.” We have interpreted this language to require a
quantifiable and direct benefit to the secured creditor; indirect
or speculative benefits may not be surcharged, nor may expenses
that benefit the debtor or other creditors. See French Mkt.
Homestead, FSA v. P.C., Ltd. (In re P.C., Ltd.), 929 F.2d 203,
205 (5th Cir. 1991); New Orleans Pub. Serv., Inc. v. First Fed.
Sav. & Loan Ass’n (In re Delta Towers Ltd.), 924 F.2d 74, 76-77
7
(...continued)
Union Planters Bank, N.A., 120 S. Ct. 1942 (2000), establishes
that no one but the trustee has statutory standing to seek a
surcharge under 11 U.S.C. § 506(c). TNB did not raise this issue
before the bankruptcy or district courts, as Hartford was decided
during the pendency of the appeal. Because this issue was not
raised below, it is not clear whether the trustee authorized or
ratified Parker’s action in a way that might overcome the
Hartford problem. See id. at 1951 n.5. In view of our denial of
relief to Parker, no purpose would be served by remand to
consider this issue.
8
TNB does not argue that its failure to request a hearing
on Parker’s first motion for surcharge constitutes excusable
neglect.
9
(5th Cir.), reh’g denied, 1991 U.S. App. LEXIS 4829 (1991). The
default rule in bankruptcy is, accordingly, that administrative
expenses are paid out of the estate and not by the secured
creditors of the debtor. See P.C., Ltd., 929 F.2d at 205; Delta
Towers, 924 F.2d at 76-77. The remediation of the waste oil did
not benefit TNB, as the waste oil was stored in drums on the
Grimland premises and did not, apparently, contaminate any of
Grimland’s personal property. Nor did the storage of the
personal property on Grimland’s premises benefit TNB. As a
secured creditor, TNB was entitled to repossess and auction off
its collateral. That the auction was conducted by the trustee
afforded TNB no real benefit beyond what it could have recovered
on its own. Thus, it seems clear that entry of this surcharge
order was contrary to established law.
Circuit precedent does allow the use of Rule 60(b), made
applicable to bankruptcy proceedings by Fed. R. Bankr. P. 9024,
to correct judicial error. When a judicial decision contains an
obvious error of law, apparent on the record, then the error may
be corrected as a mistake pursuant to Rule 60(b). The error of
law must involve a fundamental misconception of the law or a
conflict with a clear statutory mandate. See Hill v. McDermott,
827 F.2d 1040, 1043 (5th Cir. 1987), cert. denied, 484 U.S. 1075
(1988); Chick Kam Choo v. Exxon Corp., 699 F.2d 693, 695 (5th
10
Cir.), cert. denied sub nom. Chick Kam Choo v. Esso Oil Co., 464
U.S. 826 (1983).
Granting or denying a motion under Rule 60(b) is within the
discretion of the district court, and we review that decision
only for an abuse of discretion. See Halicki v. La. Casino
Cruises, Inc., 151 F.3d 465, 470 (5th Cir. 1998), cert. denied,
526 U.S. 1005 (1999). Parker argues that the bankruptcy court,
and the district court in affirming the bankruptcy court, did not
in fact make any mistakes in this case. Rather, it argues that
the bankruptcy court simply entered an order in response to an
uncontested motion. Parker notes, and both the bankruptcy court
and the district court agreed, that Local Rule 9014 of the
Western District of Texas puts the onus on TNB to respond and
contest the motion.
In this case, however, the local rule is not dispositive and
the bankruptcy court should have ruled on the merits of TNB’s
objection. First, TNB was entitled under the law to maintain its
entire lien position. Second, although TNB should have
recognized that the first surcharge motion could put its position
in jeopardy, the motion contained no dollar amounts which would
clearly alert TNB to the issue. The extent of the lien stripping
was unclear and the finalization of the surcharge amount remained
an open issue which was not resolved until the hearing on the
second surcharge motion. Third, appellant filed a written
11
objection before the hearing on the second surcharge motion and
participated in that hearing, making its position clear to the
bankruptcy court. Only after that hearing did the court enter an
order setting the amount of the surcharge and effectively
depriving appellant of its lien position.
Negative noticing in bankruptcy serves an important
function. It allows the court to issue orders necessary to the
prompt disposition of property and other matters essential to a
debtor’s efficient reorganization or maximization of creditors’
recoveries. Under Fed. R. Bankr. P. 9014, contested matter
motions must provide for notice and an opportunity for the
affected party to be heard. The bankruptcy court relies on the
notice to bring forth interested parties. See Oppenheim, Appel,
Dixon & Co. v. Bullock (In re Robintech, Inc.), 863 F.2d 393, 398
(5th Cir.), cert. denied, 493 U.S. 811 (1989). Nonetheless,
there was no particular urgency to the surcharge issue and any
belatedness of the objection to the open-ended request for
surcharge would not have delayed the case. The second hearing
was necessary to finalize the matter, and, as indicated, TNB
objected before that hearing and appeared at that hearing to make
its case.
Given the complete loss of the value of plaintiff’s lien in
contravention of the bankruptcy code, the bankruptcy court should
have considered the totality of the circumstances, and not just
12
the purported technical delay in responding to the first motion.
On the one hand, the bankruptcy court is a court of equity and it
must undertake an analysis of equitable considerations. On the
other hand, rarely does a court abuse its discretion in holding
parties to strict time limits found in local rules. Cf. FDIC v.
Yancey Camp Dev., 889 F.2d 647, 649 (5th Cir. 1989) (setting
aside default judgment issued after party failed to answer motion
timely because “the extraordinary facts of [that] case
command[ed] such a result”). This, however, is such a rare case.
In view of the representations made to appellant by the
trustee as to the security of its position, Parker’s choice of
motion language, the lack of time pressure, the lack of equitable
factors in Parker’s favor and the extreme deprivation of TNB’s
legal rights, the bankruptcy court abused its discretion in not
hearing appellant’s claim on the merits at the hearing on the
second motion to finalize the surcharge. It also abused its
discretion in failing to reconsider its denial of appellant’s
objection to the surcharge. See Seven Elves, Inc. v. Eskenazi,
635 F.2d 396, 403 (5th Cir. Unit A Jan. 1981) (despite strong
interest in finality, Rule 60(b) construed liberally so as to
hear case on merits).
Accordingly, the order of the district court is REVERSED and
this matter is REMANDED for proceedings consistent herewith.
13